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[C-580-504]

Preliminary Affirmative Countervailing Duty Determination; Offshore Platform Jackets and Piles From Korea

Friday, July 19, 1985

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AGENCY: Import Administration, International Trade Administration, Commerce.

ACTION: Notice.

SUMMARY: We preliminarily determine that certain benefits which constitute subsidies within the meaning of the countervailing duty law are being provided to manufacturers, producers, or exporters in Korea of offshore platform jackets and piles. The estimated net subsidy is 9.58 percent ad valorem for Daewoo Shipbuilding and Heavy Machinery, Ltd./Daewoo Corporation and 4.14 percent ad valorem for Hyundai Heavy Industries Co., Ltd/Hyundai Corporation.

We have notified the U.S. International Trade Commission (ITC) of our determination. We are directing the U.S. Customs Service to suspend liquidation of all entries of offshore platform jackets and piles from Korea that are entered, or withdrawn from warehouse, for consumption on or after the date of publication of this notice, and to require a cash deposit or bond on entries of these products in the amount equal to the estimated net subsidy.

If this investigation proceeds normally, we will make our final determination by September 30, 1985.

EFFECTIVE DATE: July 19, 1985.

FOR FURTHER INFORMATION CONTACT: Mary Martin or Rick Herring, Office of Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, D.C. 20230; telephone: (202) 377-3464 or 377-0187.

SUPPLEMENTARY INFORMATION:

Preliminary Determination

Based upon our investigation, we preliminarly determine that there is reason to believe or suspect that certain benefits which constitute subsidies within the meaning of section 701 of the Tariff Act of 1930, as amended (the Act), are being provided to manufacturers, producers, or exporters in Korea of offshore platform jackets and piles. For purposes of this investigation, the following programs are found to confer subsidies:

- Export Credit Financing from the Korea Export-Import Bank;

- Accelerated Depreciation under Article 25 of the "Act Concerning the Regulation of Tax Reduction and Exemption"; and

- Tax Incentives for Exporters under Articles 22, 23, and 24 of the "Act Concerning the Regulation of Tax Reduction and Exemption."

We determine the estimated net subsidy to be 9.58 percent ad valorem for Daewoo Shipbuilding and Heavy Machinery Ltd./Daewoo Corporation and 4.14 percent ad valorem for Hyundai Heavy Industries Co., Ltd./Hyundai Corporation.

Case History

On April 19, 1985, we received a petition in proper form from the Kaiser Steel Corporation and the International Brotherhood of Boilermakers, Ironship Builders, Blacksmiths, Forgers and Helpers, filed on behalf of the U.S. industry producing offshore platform jackets and piles. In compliance with the filing requirements of section 355.26 of the Commerce Regulations (19 CFR 355.26), the petition alleged that manufacturers, producers, or exporters in Korea of offshore platform jackets and piles directly or indirectly receive benefits which constitute subsidies within the meaning of section 701 of the Act, and that these imports materially injure, or threaten material injury to, a U.S. industry.

We found that the petition contained sufficient grounds upon which to initiate a countervailing duty investigation, and on May 9, 1985, we initiated this investigation (50 FR 20253). We stated that we expected to issue a preliminary determination by July 15, 1985.

Since Korea is a "country under the Agreement" within the meaning of section 701(b) of the Act, an injury determination is required for this investigation. Therefore, we notified the ITC of our initiation. On June 3, 1985, the ITC determined that there is a reasonable indication that these imports materially injure, or threaten material injury to, a U.S. industry.

We presented a questionnaire concerning the allegations to the government of Korea in Washington, D.C. on May 20, 1985.

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On June 24, 1985, we received responses to our questionnaire from the government of Korea, Daewoo Shipbuilding and Heavy Machinery Ltd., and Daewoo Corporation (the manufacturer and exporter of Platform Harvest), and Hyundai Heavy Industries Co. Ltd., and Hyundai Corporation (the manufacturer and exporter of Platform Julius).

The Department has received letters and comments from several U.S. importers of platform jackets and piles from Korea claiming that the petition was not filed on behalf of the U.S. industry producing platform jackets and piles. However, we have not received any opposition from any members of the domestic industry.

Scope of Investigation

The products covered by this investigation are steel jackets (templates) and piles for offshore platforms, subassemblies thereof that do not require removal from a transportation vessel and further U.S. onshore assembly, and appurtenances attached to the jackets and piles. These platforms are also known as conventional fixed platforms and are permanently affixed by the piles to the seabed. The platforms are not mobile. These jackets and piles are currently provided for in item 652.97 of the 1985 Tariff Schedules of the United States (TSUS).

Analysis of Programs

Throughout this notice, we refer to certain general principles applied to the facts of the current investigation. These principles are described in the "Subsidies Appendix" attached to the notice of "Cold-Rolled Carbon Steel Flat- Rolled Products from Argentina; Final Affirmative Countervailing Duty Determination and Countervailing Duty Order," which was published in the April 26, 1984, issue of the Federal Register (49 FR 18006).

Consistent with our practice in preliminary determinations, where a response to an allegation denies the existence of a program, receipt of benefits under a program, or eligibility of a company or industry under a program, and the Department has no persuasive evidence showing that the response is incorrect, we accept the response for purposes of the preliminary determination. All such responses are subject to verification. If the response cannot be supported at verification, and the program is otherwise countervailable, the program will be considered a subsidy in the final determination.

During the period 1983 through the first quarter of 1985, two Korean firms were awarded contracts for construction of platform jackets and piles for the United States, Daewoo Shipbuilding and Heavy Industries and Hyundai Heavy Industries. The two platforms are Platform Harvest and Platform Julius. Very recently we have learned that a third contract was awarded to Daewoo in April, 1985 for Platform Esther.

For purposes of this preliminary determination, we investigated only the manufacturers of these platforms and we calculated the subsidy conferred upon the two platforms, Harvest and Julius. This is a departure from our normal practice, where we choose for purposes of the investigation an historical period and calculate subsidies bestowed on the total output or exports during that period.

In this case, the normal practice does not apply. Once a contract for a platform is awarded, it can take fourteen months to construct and then, after it is entered into the United States, payment terms are extended for up to ten years. Also, as noted above, there have been only three contracts awarded to Korean firms in over two years. Therefore, were we to choose 1984, for example, as the period for which we are measuring subsidization, there would be no exports of the subject merchandise.

Because of the lack of a period which is representative of total subsidies bestowed on total exports of the subject merchandise and because of the small number of contracts and their dollar value, we have calculated the subsidy conferred on each of the two platforms, Harvest and Julius. We have chosen these particular sales because they constitute entries of the merchandise that are potentially liable for countervailable duties. We would have included Platform Esther, but information on this contract was received too late.

Based upon our analysis of the petition, information submitted by petitioners, and the responses to our questionnaires submitted by the government of Korea, Daewoo Shipbuilding and Heavy Machinery, Daewoo Corporation, Hyundai Heavy Industries, and Hyundai Corporation, we preliminarily determine the following:

I. Programs Determined To Confer Subsidies

We preliminarily determine that subsidies are being provided to manufacturers, producers, or exporters in Korea of offshore platform jackets and piles under the following programs:

A. Export Credit Financing from the Export-Import Bank of Korea.
Petitioners allege that the U.S. purchasers of the subject merchandise receive preferential buyer's credit from the Export-Import Bank of Korea.

The Export-Import Bank of Korea (KXMB) was inaugurated on July 1, 1976, under the authority of the Export-Import Bank of Korea Act (Law No. 2122; July 28, 1969). The purpose of this Act is to promote the sound development of the national economy and economic cooperation with foreign countries by extending financing for export and import transactions, overseas investments and development of natural resources abroad.

The KXMB has provided two types of export credit: (1) a pre-delivery loan to cover the period of construction of the project, and (2) a deferred export credit in the form of a post-delivery loan for ten years including a two-year grace period. To be eligible for deferred export credit, the following criteria must be met by the exporter: (1) The contract on the sale must require a minimum 15 percent cash payment by the foreign purchaser; (2) the requested financing cannot exceed a 10-year period for loans greater than U.S. $1,000,000; and (3) the requested financing cannot be at interest rates below the KXMB's lending rates.

For pre-delivery financing, interest is pre-paid quarterly beginning at the time each principal installment is drawn down and extending throughout the life of the loan. Interest on the post-delivery loan is paid semi-annually on a retroactive basis. The principal of the pre-delivery loan is repaid in one lump sum at the time of acceptance of delivery. Post-delivery financing is repaid semi-annually over an eight-year period beginning two years after disbursement of the loan. The KXMB requires that the borrower obtain Medium- and Long-Term Credit Risk Insurance for post-delivery financing. For our determination on the Export Credit Insurance program, see the section "Program Determination Not to Confer a Subsidy."

Daewoo Corporation and Hyundai Corporation have both received pre- and post- delivery financing for Platform Julius and Platform Harvest, respectively, from the KXMB. The financing is in the form of seller's credits, rather than buyer's credits as alleged by petitioners; i.e., the lending is direct to the manufacturer/exporter. Daewoo received all of its financing at a fixed interest rate of 9 percent, while Hyyundai received its pre-delivery loan at a fixed interest rate of 9 percent and

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its post-delivery loan at a fixed interestbrate of 10 percent. These are dollar-denominated loans.

In order to determine if the KXMB financing is preferential, we sought the cost to Daewoo and Hyundai of comparable alternative fixed-interest dollar- denominated commercial financing. Since these are long-term loans, we first reviewed the credit histories of both of the companies. We found that both have received commercial long-term dollar-denominated loans, but all were at variable interest rates. We also learned that there are no commercial fixed- rate dollar loans available in Korea. However, we discovered that there is a well-established international market available to companies that wish to swap variable-rate dollar obligations for fixed-rate dollar obligations, and that Daewoo has participated in this market. Based on the fact that one of the producers under investigation has used the swap market on a number of occasions, and on a careful review of information we obtained regarding all alternative sources of long-term fixed-interest dollar-denominated commercial financing, we preliminarily determine that, absent the availability of the KXMB financing, both Daewoo and Hyundai would have most likely obtained long-term fixed-interest dollar-denominated commercial financing for the projects under investigation in the swap market. Furthermore, based on company-specific information regarding the terms Hyundai received on commercial long-term variable-rate dollar loans actually used in the financing of Platform Julius, and technical analysis of the structure of swap arrangements during the relevant time periods, we were able to determine the fixed-interest financing costs which each company would have had to bear after a swap. A comparison of these rates with those of the companies' KXMB loans indicates that, in the case of both loans to both companies, the KXMB export financing rates are less. Because this financing is contingent upon export and the rates of interest charged are less than that on comparable commercial financing, we preliminarily determine that this program confers a countervailable benefit.

Under our normal methodology for allocating the benefits of long-term loans, benefits are deemed to begin accruing at the time of the first cashflow effect and continue through the life of the loan. Therefore, if we were measuring subsidization in calendar year 1984, for example, and the first interest payment would not be made until 1985, then we would find no benefits conferred upon exports of the subject merchandise in 1984. Instead, the benefits of the loan would be allocated to exports in 1985 and each year thereafter for as long as the loan was outstanding.

The use of our standard long-term loan methodology is not appropriate in this case because of the nature of the platform jackets and piles market. In the first place, the loans in question can be unquestionably tied to specific plaforms. Secondly, allocating the benefits over the life of the loan would mean we might not capture, and countervail, all the benefits conferred upon these exports. This is because Platform Harvest and Platform Julius would be imported into the United States and their entries liquidated by U.S. Customs ten years before the last interest payments would be made on the Export-Import Bank loans; i.e., ten years before the last countervailable benefits would be conferred upon the products.

In order to capture the full benefit conferred by each of the KXMB loans, we measured the difference in the present value of the repayment stream on the KXMB loans and the repayment stream on swap market financing. This amount was divided by the contract value of the respective platform. Using this methodology, we calculated an export subsidy of 9.4 percent ad valorem for Daewoo Shipbuilding and Heavy Machinery, Ltd./Daewoo Corporation and 3.91 percent ad valorem for Hyundai Heavy Industries Co., Ltd./Hyundai Corporation.

B. Acclerated Depreciation Under Article 25 of the "Act Concerning the Regulation of Tax Reduction and Exemption."
Article 25 of the "Act Concerning the Regulation of Tax Reduction and Exemption" permits a firm earning more than 50 percent of its total proceeds in a business year from foreign exchange to increase its normal depreciation by 30 percent. If the corporation has received less than 50 percent of its total proceeds from foreign exchange, it can still claim some accelerated depreciation, determined by a formula based on the firm's foreign exchange earnings and total business earnings. Of the firms manufacturing or exporting the products under investigation, only Hyundai Heavy Industries, the manufacturer of Platform Julius, used accelerated depreciation under this program. Because the use of accelerated depreciation is contingent upon export performance, we determine that this program confers benefits which constitute export subsidies.

Under our normal methodology for determining the benefits from export-related accelerated depreciation, we would calculate the subsidy based on the tax savings received during the period of review and attribute it to export sales during the same period. For the same reasons described supra regarding KXMB financing, however, the use of our standard methodology is not appropriate in this case. Hyundai Heavy Industries will record no export sales income from Platform Julius until it files its taxes in 1986 and 1987. The most recent year in which taxes have been filed is 1984. Therefore, none of the tax savings in 1984 derive from, or are attributable to, sales of the subject merchandise to the United States.

In order to capture and countervail all of the tax benefits attributable to Platform Julius, we should calculate the present value of the benefits that will accrue in 1986 and 1987. Obviously, it is impossible to make this calculation in 1985 because we do not know how much or whether accelerated depreciation will be claimed. Therefore, believing it to be the only reasonable alternative methodology available to us, we have instead calculated the benefit that would have accrued in 1984 (the most recent year for which we have all the necessary data) had the entire sales income earned from Platform Julius been reported in that year. Using this methodology, we found a subsidy of 0.15 percent ad valorem for Hyundai Heavy Industries.

C. Tax Incentives for Exporters Under Articles 22, 23 and 24 of the "Act Concerning the Regulation of Tax Reduction and Exemption".
Articles 22, 23 and 24 of the "Act Concerning the Regulation of Tax Reduction and Exemption" provide for the deduction from taxable income of a number of different reserves relating to export activities. These reserves cover export losses, overseas market development and price fluctuation losses. Under Article 22, a corporation may establish a reserve amounting to one percent of the foreign exchange earnings or 50 percent of net income in the applicable period, whichever is smaller. If certain export losses occur, they are offset from the reserve fund. If there are no offsets for export losses, the reserve is returned to the income account and taxed, after a one-year grace period, over a three-year period.

Under Article 23, governing overseas market development, a corporation may establish a reserve fund amounting to one percent of its foreign exchange earnings in the export business for the respective business year. Expenses

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incurred in developing overseas markets are offset from the reserve fund. Like the export loss reserve fund, if there are no offsets for expenses, the reserve is returned to the income account and taxed, after a one-year grace period, over a three-year period.

A price fluctuation reserve fund may be established under Article 24. Under this article, a corporation may establish reserves equivalent to five percent of the book value of the products and works in progress which will be exported by the close of the business year. This reserve may be used to offset losses incurred from the fluctuation of prices for export goods. These losses may be offset by returning an amount equivalent to the losses to the income account. If not so utilized, the reserve is returned to the income account the following business year.

The balance in all three reserve funds is not subject to corporate tax, although all moneys in the reserve funds are eventually reported as income and subject to corporate tax either when they offset export losses, are used to develop overseas markets, or when the grace period expires. Daewoo Corporation claimed reserves under Articles 22 and 23 and Hyundai Heavy Industries claimed reserves under Article 22. We determine that these export reserve programs confer benefits which constitute export-subsidies because they provide a deferral of direct taxes specifically related to export performance.

As with the previous programs, our normal methodology for calculating the benefit arising from these tax deferrals does not apply in this case. This is because the deferrals currently being enjoyed are not derived from sales of the subject merchandise to the United States. Nor can we anticipate that there will be imports in each of the years that deferrals attributable to these sales are in effect. Therefore, to calculate the benefits received under this program applicable to the products under investigation, we first took one percent of the value of the platform contract and treated it as if it were placed into the respective reserve fund based on when the company would enter the contract value as sales revenue in its accounting records. For Daewoo Corporation the entire one percent was treated as it it were put into each of the tax-free reserves on the date of shipment of the platform. Hyundai Heavy Industries recognizes income progressively during the period of construction rather than in one lump-sum on a single date, and thus, the one percent of the contract was divided into two reserves.

Because these export reserve funds constitute a deferral of tax liabilities, we treat the tax savings on these funds as short-term interest-free loans. Thus, we took the tax savings on one percent of the contract value (or that portion of the contract treated as sales revenue) for the platform in the year in which it would be treated as sales revenue and treated it as a zero-interest loan, rolled over in each year that taxes would be deferred. We compared the zero-interest that would be paid in each year to the interest that would be paid had the money been borrowed from commercial sources. We used as our benchmark the average interest rate on commercial short-term loans in Korea which we preliminarily determine to be 10.75 percent. The source of our benchmark determination is the Bank of Korea's Monthly Statistical Bulletin. We necessarily assumed that this benchmark interest rate would extend into the future periods. We then calculated the present value of the benefits in each of the years in which there would be a tax savings accruing to the respective reserve funds. We then took the total benefit for each of the reserve funds and allocated it over the contract value of the respective platform. Using this methodology, we calculated a subsidy of 0.16 percent ad valorem for Daewoo Shipbuilding and Heavy Machinery, Ltd./Daewoo Corporation and 0.08 percent ad valorem for Hyundai Heavy Industries Co., Ltd./Hyundai Corporation.

II. Program Preliminarily Determined Not To Confer a Subsidy

A. Export Credit Insurance by the Export-Import Bank of Korea.
Petitioners allege that the Korean government makes substantial contributions to the export credit insurance program of the Export-Import Bank of Korea and that this program is not self-supporting, thus providing countervailable benefits to producers of the subject merchandiseThe Korean Import Bank operates an export insurance program which provides commercial, political and managerial risk insurance. A separate budget for this program is maintained by the Export-Import Bank. Hyundai Corporation and Daewoo Corporation have both applied for commercial risk insurance. Purchase of this insurance is compulsory on all loans provided by the Export-Import Bank of Korea.

To be a subsidy, a government-operated insurance program has to charge premiums which are inadequate to cover the long-term operating costs and losses of the program. The government of Korea states that the insurance program has been not only self-sustaining, but also very profitable since its inception. They further state that the government has never contributed funds to cover losses and that the level of premiums charged far exceeds the costs associated with claims against the insurance policies.

We reviewed the financial statements for the last five years for the export insurance fund, and have preliminarily determined that the premiums charged to exporters allow the Export-Import Bank of Korea to cover its losses and its long-term operating expenses. Therefore, we preliminarily determine that this program does not constitute a subsidy.

III. Programs Preliminarily Determined Not to be Used

We have preliminarily determined that manufacturers, producers, or exporters in Korea of off shore platform jackets and piles do not use the following programs:

A. Short-term Export Financing.
Petitioners allege that the manufacturers and exporters receive preferential export financing under the Export Financing Regulations. According to the government of Korea, this program was not used by manufacturers and exporters of the subject merchandise because projects receiving deferred export financing from the Export-Import Bank of Korea are not eligible for short-term loans under the Export Financing Regulations.

B. Special Depreciation Under Article 11 of the "Act Concerning the Regulation of the Tax Reduction and Exemption".
Petitioners allege that certain designated industries receive preferential depreciation benefits under Article 11. According to the government of Korea, assets used to construct jackets and piles are not eligible for accelerated depreciation under Article 11.

C. Export Guarantees From Export-Import Bank of Korea.
Petitioners allege that producers of the subject merchandise receive advance payment export guarantees and performance export guarantees from the Export-Import Bank of Korea. According to the government of Korea, the platform jackets and piles covered by this investigation have not received such guarantees from the Export-Import Bank of Korea.

IV. Program Determined Not to be an Independent Program

We preliminary determine that the following is not an individual export loan program:

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A. Deferred Export Loans through the National Investment Fund. Petitioners allege that National Investment Fund loans provided through the Export-Import Bank of Korea are used to finance exports of the subject merchandise on a deferred payment basis and at below-market interest rates.

According to the government of Korea, the National Investment Fund (NIF) is a specific type of financing and not a particular loan program. The only deferred export financing authorized under the NIF is wholly administered by the Export-Import Bank. There is no separate facility under the NIF to grant such financing. The NIF's only participation in the export credit financing program is as a source of funding in the Export-Import Bank's budget. The NIF is not involved in any way with the individual loan decisions made by the Export-Import Bank and the interest rates charged to exporters by the Bank are the same regardless of the source of financing. Therefore, we preliminarily determine that the NIF is not a specific export loan program but a source of funding within the Export-Import Bank's Export Credit Financing program which is discussed in the section "Programs Determined to Confer Subsidies".

Verification

In accordance with section 776(a) of the Act, we will verify the data used in making our final determination.

Suspension of Liquidation

In accordance with section 703(d) of the Act, we are directing the U.S. Customs Service to suspend liquidation of all entries of offshore platform jacket and piles which are entered or withdrawn from warehouse, for consumption, on or after the date of publication of this notice in the Federal Register, and to require a cash deposit or bond in the amount of 9.58 percent ad valorem for Daewoo Shipbuilding and Heavy Machinery, Ltd./Daewoo Corporation and 4.14 percent ad valorem for Hyundai Heavy Industries Co., Ltd./Hyundai Corporation. The cash deposit or bonding rate for imports of the subject merchandise from all other companies is 7.22 percent ad valorem. This suspension will remain in effect until further notice.

ITC Notification

In accordance with section 703(f) of the Act, we will notify the ITC of our determination. In addition, we are making available to the ITC all nonprivileged and nonconfidential information relating to this investigation. We will allow the ITC access to all privileged and confidential information in our file, provided the ITC confirms that it will not disclose such information, either publicly or under an administrative protective order, without the written consent of the Deputy Assistant Secretary for Import Administration. If our final determination is affirmative, the ITC will make its determination of whether these imports materially injure, or threaten material injury to, a U.S. industry within 45 days after our final determination.

Public Comment

In accordance with s 355.35 of the Commerce Department Regulations, if requested, we will hold a public hearing to afford interested parties an opportunity to comment on this preliminary determination at 10:00 a.m. on September 4, 1985, at the U.S. Department of Commerce, Room 1414, 14th Street and Constitution Avenue, NW., Washington, D.C. 20230. Individuals who wish to participate in the hearing must submit a request to the Deputy Assistant Secretary for Import Administration, Room B099, at the above address within 10 days of this notice's publication. Requests should contain: (1) The party's name, address, and telephone number; (2) the number of participants; (3) the reason for attending; and (4) a list of the issues to be discussed. In addition, prehearing briefs in at least 10 copies must be submitted to the Deputy Assistant Secretary by August 28, 1985. Oral presentations will be limited to issues raised in the briefs.

In accordance with 19 CFR 355.33(d) and 19 CFR 355.34, written views will be considered if received not less than 30 days before the final determination or if a hearing is held, within 10 days after the hearing transcript is available.

This notice is published pursuant to section 703(f) of the Act (19 U.S.C. 1671b(f)).

Dated: July 15, 1985.

Gilbert B. Kaplan,

Acting Deputy Assistant Secretary for Import Administration.